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Is it a good time to be buying property?

Cut through the noise: Everything U need to know about the Australian property market in 20 slides.

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The Rise

Residential real estate in Australian has had an incredible 3 year growth period with combined capital city home values increasing by 30.8%. Over the past twelve months prices across the combined capital cities have increased by 10.2% with Sydney prices increasing by a massive 17.6%. This has left people scratching their heads wondering if now is the time to get into the property market?

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The performance of real estate has not been even across all states. This has been driven by the downswing in resources and flow on affects on the states heavily tied to them.

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State vs StateChart 1: Annual change in capital city dwelling values

Source: CoreLogic

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The million dollar question is what is going to happen next? According to the media – utter MAYHEM:

5No need to panic (hopefully)Taking a more level-headed approach there are, generally speaking, 3 distinct views to where house prices are heading:

1 THE BULLThis is the positive group who say Australian property is not over-valued and prices will continue on their merry way. The bulls will point to the fact that prices are rising this decade in the same manner they have in the previous two and that housing supply continues to lag demand.

2 THE NEUTRALThe fence sitters will say that Australian property has had a very good run and that a slow down in growth is likely.

3 THE BEARThese people will say that Australian property prices are not being driven by the fundamentals and that we are in a bubble. They will point to lower auction clearance rates, record debt levels and a recent dip in prices as signs that the bubble is about to burst.

6Economics 101 – Demand & Supply

Demand

• Economic Growth• Interest Rates• Population Growth• Foreign Investment and;• Government Taxes/Policies

Supply

• The number of houses being built relative to this demand, particularly population growth, is also another major driver of house prices.

To understand where real estate prices are heading we need to look at the drivers:

7Economic Growth

Strong economic growth means higher employment, higher wages, increased wealth and higher demand for housing both for investment and living purposes. The Australian economy has been resilient over the past few years however we think the risks to economic growth are skewed to the downside. This will be driven by declining commodity prices, weak income growth, sharp declines in investment expectations and a peaking in the contributions to economic growth from housing.

2011 2012 2013 2014 2015e 2016e 2017e2.3% 3.7% 2.5% 2.5% 2% 3% 3%

Table 1: Australia’s GDP growth

Sources: RBA, World Bank

8Interest Rates & Loan AffordabilityThe RBA cash rate is currently sitting at an all time low of 2%. The cash rate is the driver of mortgage rates and the low rate has made housing more affordable to more people. However – in the last two weeks the big four banks have increased their mortgage rates while interest rates on investment loans have also risen independently of changes in the cash rate. Our view is that interest rates will stay very low for a while longer which could support property prices.

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Chart 2: Australia’s Cash Rate

9Interest Rates & Debt

The Bears will often point to Australia’s debt levels as an indicator that we are heading for a crash. Chart 3 shows how much more debt Australians’ have taken on in the past 10 years. Since 2005 total household debt has doubled. Meanwhile household debt/disposable income is at an all time high having increased by 11% in just 5 years after being stable for about 10 years. These high debt levels leaves Australians very susceptible to an increase in interest rates or a slowdown in economic growth.

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Chart 3: Australia’s Debt Levels

Source: ABS

10Population Growth

It’s a fact - more people requires more housing and Australia is a pretty popular place to live. Australia’s population grows at approximately 1.5%-2% per year (~350,000 people per annum) through a combination of births and migration. Growth has slowed a touch in recent times due to lower Net Migration.

Chart 4: Australia’s annual population growth

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Source: ABS

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12Foreign Investment

The impact of overseas buyers, particularly the Chinese, has gotten a lot of press lately and is expected to be a contributor to the recent surge in prices; especially in Sydney & Melbourne. However – this could change due to the dual impact of new taxes imposed on foreign investment in residential property and tightening of capital outflows restrictions by the Chinese government. Despite these policy changes, Australia remains an attractive investment destination due to a low Australian dollar a resilient (to this point!) economy.

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Chart 5 – Foreign Residential Property Sales Over the past 3 months, what proportions of total residential property sales in your business

have been to foreign (non-Australian) buyers

Source: ANZ/Property Council Survey, CoreLogic

13Government Policies

Aside from monetary policy (setting the cash rate) the government (usually through APRA – regulator of banks) sometimes sets certain rules that has a direct impact on the property market. Recently there have been three major announcements that could have a real impact on property prices:

Jul-15• APRA decides banks can’t grow property investment loans by more than 10% p.a. To enforce this rule – banks have increased interest rates on investment loans by 25 basis points. Higher interest rates means less people borrowing which means less demand for property.

Jul-15• APRA decides banks need more capital. Without getting to technical, the result of APRA’s decision is that costs for banks have increases and to offset these costs banks have decided to increase rates on mortgages

2015• Throughout 2015 the Australian Government has introduced a number of measures to both crack down on the number of foreign buyers in Australia and impose new taxes on them. Longer term these changes may put a brake on demand for Australian property by foreign buyers.

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SupplyOversupply of any product will cause a price decline while undersupply will cause a price rise. The same rings true in the property market.

15Dwelling units completed

Australia completes, on average, around 40,000 “dwelling units” (i.e a structure or the part of a structure that is used as a home, residence or sleeping place) per year. As Chart 6 suggests, this number fluctuates quite a bit. The recent spike in construction is largely attributed to developers wanting to capitalize on the surge in real estate prices. Mar-

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Source: ABS

16Housing vs Population

Looking at chart 7, which compares population growth to dwelling growth, we can see that since June-2005 population growth has outstripped housing growth by 2.4x.

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Chart 7: Housing vs Population growth

Source: ABS

17Undersupply?

• The ABS census finds an average 2.5 people per dwelling. Keeping this in mind, the question that needs to be asked is this – are enough houses being built for the additional population? For a 3-4 year period starting in 2007 the answer was no. There was a housing shortage over this period as population growth outstripped housing by more than 3 to 1.

• However, a combination of higher dwelling construction and lower net migration has seen dwelling units/population growth hover around 2.4x which would suggest that the recent surge in prices has been driven by “non-residential” sources of demand (i.e. foreign investment, domestic investment, speculation etc.)

18What will the drivers be?

The table below sums up the various drivers of house prices and what we think the trend will be over the next few years:

2011 - Present

Rest of 2015 2016 2017 2017+

Eco GrowthInterest Rates

Pop. Growth

Foreign InvestmentGovt. Policies

Supply

19Is it time to buy a property

• Over the past 3-4 years the stars have aligned to drive property prices higher.

• At capitalU we feel that a lot of these drivers are going to turn neutral or negative in the short to medium term. A slow down in economic growth, increase in housing supply and a decrease in speculative investment by both domestic and foreign buyers will take some heat out of the market. Some of the downward pressure will be offset by a continuation of record low interest rates.

• Overall we do not see a sharp decline in residential prices but rather a period of flat to low growth. The risk is definitely to the downside – we believe there is no harm in waiting a couple years to see how the market performs before jumping in. At capitalU we can help you plan for your eventual property purchase through a free financial plan that will help you budget, plan, invest and save your way to your dream property

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